The latest report from the Congressional Budget Office highlights a number of reasons why the CBO is concerned about the implementation of Obamacare. It boils down to this: Obamacare is going to be more expensive than the Obama administration thought, disrupt the marketplace more than it thought, and be tougher to implement than it thought.

First, more expensive: The CBO significantly hiked the amount of money needed to fund the subsidies available through Obamacare’s exchanges, hiking them by $233 billion. IBD explains:

The CBO’s new baseline estimate shows that ObamaCare subsidies offered through the insurance exchanges – which are supposed to be up and running by next January – will total more than $1 trillion through 2022, up from $814 billion over those same years in its budget forecast made a year ago. That’s an increase of nearly 29%. The CBO upped the 10-year subsidy cost by $32 billion since just last August.” Part of that is expecting more people in the exchanges thanks to employer dumping and more limited Medicaid expansion, but “The rest is largely the result of the CBO’s sharp increase in what it expects the average subsidy will be. Last year, the CBO said the average exchange subsidy for those getting federal help when ObamaCare goes into effect next year would be $4,780. Its latest estimate raised that to $5,510 – a 15% increase. All these numbers are up even more from the CBO’s original forecast made in 2010, which had the first-year subsidy average at $3,970.

Second, more disruptive: More employees will be dropped from their existing plans and fewer uninsured people will get coverage. The WSJ explains:

The CBO has long said it expects the new federal health law will prompt some companies to drop millions of employees from health plans because workers have new options to buy insurance on their own. In August, CBO put the number at four million over 10 years. Now it’s seven million. What changed? Nothing about the health law. Rather, the cliff deal that was enacted in January. When CBO crunched the numbers in August, it assumed that no cliff deal would be reached and higher tax rates would kick in. Economists typically assume that higher tax rates mean that more people are offered, and accept, employer-provided health benefits, says Paul Fronstin, a senior research associate at the Employee Benefit Research Institute. That’s because health benefits are tax-deductible for companies, and so are any premiums that the employee is required to contribute.

Third, more difficult to implement: The CBO isn’t buying the administration’s repeated assurances that everything will be ready to go on time when it comes to the health insurance exchanges. From the report:

CBO and JCT [Joint Committee on Taxation] have slightly reduced their estimates of the rates at which people will enroll in the insurance exchanges or Medicaid as the expansion of coverage is implemented – a process that had already been anticipated to occur gradually. That change reflects the agencies’ judgment about a combination of factors, including the readiness of exchanges to provide a broad array of new insurance options, the ability of state Medicaid programs to absorb new beneficiaries, and people’s responses to the availability of the new coverage.

Publicly, administration officials have promised that the new exchanges will be ready on time… But the CBO report expresses skepticism… In plain language, that means CBO thinks the marketplaces won’t have many insurance choices, the Medicaid enrollment systems will not be ready for new people to enroll, and people will be less enthusiastic about signing up for new insurance options.

Taken together, this is a report that shows how already, Obamacare is failing to match the hopes of its creators in many respects. Expect this trend to continue in future years. There is going to be a lot of political fractiousness and market disruption over a policy that may ultimately end up nudging the insured percentage up only slightly.

How businesses are caught between decision points on Medicaid expansion.

Under the new law, lower-paid workers at companies such as the Nashville, Tenn.-based chain of Captain D’s seafood restaurants could qualify for the national expansion of Medicaid set to begin in 2014. Having those employees on Medicaid, the health program for low-income people that is funded with federal and state dollars, would mean the workers get health insurance while the company pays nothing.

But the Supreme Court ruling on the health law last summer let states opt out of the law’s Medicaid expansion. Captain D’s operates mostly in Southern states that have signaled they will opt out, arguing that it is unfair to expose their already-strapped budgets to the federal government’s overhaul of health care.

That means the company will have to spend thousands of dollars to insure each full-time worker who can’t enroll in the program, or pay fines starting at $2,000 a person.

“If the state doesn’t expand the Medicaid coverage then by default that population becomes the responsibility of their employer,” said Michael Folks, Captain D’s general counsel and a senior vice president.

That has paved the way for tough choices for states. If states don’t expand the Medicaid programs, the cost of covering millions of uninsured full-time workers will fall to employers. But state lawmakers also worry their budgets can’t absorb the costs of participating over the long term.

To date, some 25 governors have indicated they want to take part in the expansion, including, just last week, Republicans John Kasich of Ohio and Rick Snyder of Michigan. The other 25 governors, mostly Republicans, are considering sitting out or have said they would do so, including Pennsylvania’s Tom Corbett, who said last week that he didn’t plan for his state to participate.

Some governors’ choices could be upended by state legislators, but employers have begun trying to come up with a backup plan for insuring millions of additional workers next year.

“The more people we [insure], the more our costs would certainly go up,” said Alexis Barnett Gillette, director of marketing for the Mooyah burger-and-fries chain. It owns three restaurants in Texas, where Republican Gov. Rick Perry opposes the Medicaid expansion.

Nearly 13 million workers – 10 percent of the U.S. workforce – are employed in the restaurant industry, and about half are age 30 or younger. Another 16 million are in retail. In Nebraska, 4,288 food and drinking establishments employ 71,955 workers, according to the State Department of Labor’s most recent data.

To curb the costs of insuring more workers, some companies and nonprofits are shifting people to a maximum of 28 hours a week, McGuire said. “Or they’ve joined the ‘49ers’ club and are cutting the number of full-time workers to 49,” he said.

Greg Cutchall, the restaurant company’s founder and chief executive, said he doesn’t plan to cut the hours of full-time salaried or full-time hourly workers who have been with the company for at least a year. His restaurants include Burger Star, Sonic Drive-In, Domino’s Pizza, Famous Dave’s and Paradise Bakery & Cafe. But going forward, he said “we’re not going to be offering part-time employees more than 28 hours a week.”

Cutchall currently offers health insurance to about 150 office and management employees, but only 65 have opted for coverage. The monthly premium for an individual plan is $400. Depending on their position, some workers pay half the premium, others pay 25 percent, and a handful pay nothing. Employees pay any additional premiums for family members.

Each month, Cutchall Management pays about $20,000 in insurance premiums for the 65 employees with health insurance, or $240,000 a year.

“The worst-case scenario is next year I’m going to have to insure another 300 people,” Cutchall said. He expects to pay half the $400 premium on those plans.

“I’ve been afraid to do the math. I’m afraid the numbers would scare me,” he said.

If all 300 enroll, the company will pay an additional $60,000 a month, or $720,000 a year in premiums.

“That’s a large amount of our profits,” Cutchall said. “We would have no choice but to increase our prices.”

But he expects to insure fewer workers than his worst-case scenario. He thinks a majority of his employees who are under age 32 are covered by a parent’s or spouse’s insurance. And when the company went from paying 100 percent of the premium for managers to 80 percent, more than half declined the coverage. “I was surprised at how many opted out – they’re young or don’t have a family or they think they’re invincible.”

So based on that experience, Cutchall said he would be surprised if more than 20 percent take the coverage to be offered next year.

“I expect a lot of people will just pay the penalty,” he said.

Individuals who do not carry health insurance will pay a $95 penalty in 2014, which rises to $325 or 2 percent of gross income, whichever is greater, in 2015, and then $695, or 2.5 percent of gross income, in 2016.

Governor John Kasich worked with the far-left Universal Health Care Action Network of Ohio (UHCAN Ohio) to build his case for Medicaid expansion, a central piece of President Obama’s Patient Protection and Affordable Care Act (PPACA). Washington Post blogger Sarah Kliff detailed Kasich’s strategy in a February 6 Wonkblog entry.

“Rather than having to convince the governor, Obamacare supporters were asked to focus their efforts on convincing businesses and legislators,” Kliff explained in her story, which was titled, “How Ohio’s Republican governor sold the state on expanding Medicaid.”

While the Kasich administration publicly insisted no decision had been made, UHCAN Ohio Executive Director Cathy Levine “was in regular contact with the governors’ [sic] office, sharing different budget assumptions, as to ensure they would all land near the same place.”

“The administration was totally transparent about how they were developing their numbers and analysis,” Levine told Kliff. “We went back and forth so we could try to close those differences. They worked very hard on their end on an honest analysis of those numbers.”

It turns out those numbers are built on faith in federal bureaucracy. According to UHCAN Ohio – and, as of February 4, Governor Kasich – a massive expansion of one of the nation’s most costly entitlement programs will mean healthier Ohioans and an improved state economy.

Wonkblog and other liberal outlets have suggested Medicaid expansion in Ohio is now a foregone conclusion, but Kasich must convince the state legislature to join in his embrace of socialized medicine.

PPACA promises that a federal government already $16.4 trillion in debt will pay for 100 percent of states’ Medicaid expansion costs for several years before tapering federal funding down to 90 percent. Medicaid itself “saves” money by paying care providers far less than private insurance does, and PPACA is written to build on this shell game with an assortment of penalties for hospitals that reject Medicaid patients.

Expanding Medicaid would distort Ohio’s health care market further than existing federal subsidies and mandates already do. Rather than face this politically difficult truth, Governor Kasich reached out to a socialized medicine lobbying group for help selling a key portion of a law 66 percent of Ohio voters chose to block in November 2011.

UHCAN Ohio cheered the passage of PPACA and has fought for its full implementation.

The Affordable Care Act (ACA) has a lot to do with tax policy, and the new taxes it created are starting to add up. A 2.3 percent medical device excise tax will raise $1.7 billion in revenues this year, while the new unearned income Medicare contribution tax on high-income savers will raise $20.5 billion. A tax on pharmaceuticals that took effect in 2011 will also raise $2.9 billion this year.

One of the next ACA taxes scheduled to take effect is a health insurance tax that will hit small businesses and their employees particularly hard. The tax is officially imposed on health insurance companies, but the greatest effect will be felt by their customers because the insurance companies will pass most of the burden on through higher premiums. An analysis by the nonpartisan Joint Committee on Taxation found that the tax will raise insurance premiums on average by $350–$400 per affected family in 2016.

The higher premiums caused by the new tax will also prompt some employers to self-insure rather than purchase true insurance for their workers. The tax exempts employers who self-insure, as well as certain nonprofit insurers who provide more than 80 percent of their services to Medicare, Medicaid, CHIP, or dual-eligible plans.

Normally, when some taxpayers change their behavior and avoid a tax, the tax raises less revenue than might otherwise be expected. Oddly, the insurance tax is designed in a way that prevents any revenue decline. The ACA presets the insurance tax’s total revenue yield at $8 billion next year, rising to $14.3 billion by 2018. To make this possible, each year’s tax is calculated in the following year, with the preset total tax burden allocated among insurance companies based on each company’s share of the market.

If insurance companies raise premiums to cover the tax and some employers respond by self-insuring, the result will be a bigger tax on the employers that remain in the insurance market. Of course, the bigger tax would fuel another round of premium hikes, causing more employers to self-insure, further premium increases, and so on.

Defensive medicine – the ordering of unnecessary tests and procedures to reduce the threat of malpractice litigation – has long been a lightning rod in the debate over health-care spending. Many physicians maintain that fear of lawsuits significantly affects the practice of medicine, and that reform of the malpractice system is crucial for containing costs.

On the other hand, several economic studies (including work by us) have found that states that have enacted malpractice reforms experienced a mere 2%–5% reduction in health-care spending compared to states that have not. This has led to a loose consensus among most economists and policy makers that defensive medicine is not an important contributor to U.S. health-care spending – and therefore that malpractice reform is not of much significance for containing costs.

There are reasons to believe this consensus understates the amount of defensive medicine. The relatively minor reductions in health-care spending that have been observed in comparative studies might result from the fact that, even in reform states, doctors continue to practice defensive medicine. The changes in the malpractice system may have done little to change physicians’ perceptions of the risk of being sued, and thus of the way they care for their patients.

Using data from the most recent Health Tracking Physician Survey (2008), which asked physicians about their beliefs and attitudes towards malpractice risk, we found that 68% of physicians in the five states with the highest malpractice risk reported “ordering some tests or consultations simply to avoid the appearance of malpractice.” Yet 64% of physicians in the five states with the lowest malpractice risk reported doing the same thing.